Taxanity

The tax man cometh, and for many Americans, the tax man loometh on Monday. Taxes are the grease that runs governments and ruins men. Wars have centered on taxation (whether with or without representation). Nothing stirs passion like the tithe governments extract from their citizens (or feudal lords over their serfs…tomayto/tomahto).

The bane of US citizens is not only the complaint of people everywhere that their taxes are too high, but that the burden of figuring out the taxes owed is complicated and cumbersome. (I’ll leave the question of how tax monies are federally used for another missive.)

For those who don’t know, a quick primer: the United States federal government collects income taxes once a year, as well as taxes on large capital gains (for now), social security, medicare, and other sundry programs. Most of the states (and subdivisions such as counties, cities, etc.) also collect income taxes, and the vast majority also collect sales taxes (i.e. a consumption tax) and property taxes and use taxes and…well, you get the picture. The federal income tax is based on a progressive scale…the more you make, the higher percentage of tax you pay. The various sales taxes vary widely from nothing to upwards of about 7.5% (more in communities that add on their own sales tax).

And that one paragraph does not come close to describing the US tax code. According to the US Government Printing Office, the IRS-written part is 13,458 pages in total. The full text, including the Congress-written parts, brings the gross page count to 16,845. Is it no wonder that there is a constant cry for simplification?

There have been various calls for things such as: a flat tax, a consumption tax, no inheritance or capital gains taxes (a favorite of those who are monied), and tons of others.

It seems like the only thing that makes sense is to start with a simplified flat tax for income and social programs, and a one-rate consumption tax. We give the flat income tax a reasonable bottom end where you aren’t taxed for income. The social program taxes (social security, medicare, etc.) can come in at different levels so that those on the lower-middle-class end of the spectrum don’t have this sudden transition from no-tax to full-tax…it provides a transitional area.

For the consumption tax, I propose not so much a sales tax, per se, but a gross receipts tax. In many cases it’s a semantic trick but it shifts the burden of paying the consumption tax from the consumer to business. Let’s take an example with the various state use taxes. In these, the CONSUMER is expected to track every purchase they make, figure out what tax is owed their state, and then accurately report and pay it (else there are interest and penalties). This is particularly insane. If the burden is placed on the business, the accounting is already in place. You simply tax business on their sales. Whether they list it as a sales tax, or opt to simply roll it into product pricing, makes no difference. Since the business have to report their gross income anyway, give them the burden of collecting and paying the consumption tax.

With the consumption tax, we apportion the proceeds on a per-capita basis to the states to pay for state programs. If states want to impose an additional tax on top of this, they can–however, they can *only* impose this on their own residents, but may not impose a use tax. The effect on the internet is obvious–all internet shops pay the national consumption tax, and only those businesses with in-state shops selling to residents can impose an additional tax. This way all the states get their finger in the consumption pie without placing an undue burden on business or consumers.

There are those who suggest only a consumption tax is the way to go, but it puts an undue burden on the lower-income. The reality is that the lower your income the less of it you will have available to save (i.e. not spend). That means that the more you are able to squirrel away, the less of a tax you pay giving you a lower tax burden (while also giving you an avenue to make even more money via investments and savings). Hardly equitable.

I would allow income to be computed for interest earned and adjusted capital gains. Investment (stock market) and similar gambling losses are just your tough luck. Inheritance and family gifts start making things tricky. See. This is where the tax code starts to get snarky. Once income has been taxed, it shouldn’t be taxed again, but on the other hand, there is a transfer of ownership. Also, this is an area that has been badly abused in the past. At the moment, I don’t even have a reasonable suggestion.

For the most part, I’m not a big fan of tax breaks and industry-specific subsidies. Unless it’s a living necessity (e.g. clean water, clean air, clean land), it seems like paying fair value is reasonable.

Honestly, I don’t think a simplified tax code is insurmountable…provided you have the political will to make the people who paid for your campaign momentarily unhappy. Thing is, Americans basically appreciate fundamental fairness and predictability. Some will be stung, but ultimately people will be accepting. As long as the solution doesn’t seem unduly burdensome on any one class, everyone will be willing to go along.

And one last thing that isn’t directly related to any of this. Establish a common value basis for money–say, the 2000 dollar. Have all government reports (unless having a specific reason for reporting raw data) based on this metric. Why? So that we always have an indication of what government is taking in and spending based on a non-varying standard that always takes inflationary adjustments into account without having to state what your basis of comparison is.